Down Payment Strategies: How Much Should You Put Down?
The "right" down payment depends on your financial situation, not a universal rule. Putting 20% down eliminates PMI and gives you lower monthly payments, but it also means locking up a huge chunk of cash. Putting 3.5% down gets you into a home faster but costs more monthly and adds PMI on top.
Here's how down payment size affects a $400,000 home purchase with a 6.5% interest rate on a 30-year mortgage:
| Down Payment | Cash Needed | Loan Amount | Monthly P&I | PMI |
|---|---|---|---|---|
| 3.5% ($14,000) | $24,000–$26,000 | $386,000 | $2,440 | $161/mo |
| 5% ($20,000) | $30,000–$32,000 | $380,000 | $2,402 | $158/mo |
| 10% ($40,000) | $50,000–$52,000 | $360,000 | $2,275 | $150/mo |
| 20% ($80,000) | $90,000–$92,000 | $320,000 | $2,023 | $0 |
Going from 3.5% to 20% down saves $417/month in P&I plus eliminates $161/month in PMI—that's $578/month or $6,936/year. But you need $66,000 more in cash upfront. If you'd invest that $66,000 instead, earning 7% annually, it grows to roughly $130,000 in 10 years. The math is never as simple as "bigger down payment = better."
PMI Explained: What It Costs and How to Remove It
Private mortgage insurance (PMI) protects the lender—not you—when your down payment is less than 20%. It typically costs 0.3% to 1.5% of the original loan amount per year, added to your monthly payment. On a $360,000 loan at 0.5% PMI, that's $1,800/year or $150/month.
You can remove PMI in three ways:
- Request cancellation at 20% equity. Once your loan balance drops to 80% of the original home value, contact your servicer in writing. They may require a home appraisal at your expense ($300–$500).
- Automatic termination at 22% equity. Under the Homeowners Protection Act, your servicer must cancel PMI when your balance hits 78% of the original purchase price. No request needed.
- Refinance once you have 20% equity. If your home has appreciated significantly, refinancing into a new loan at 80% LTV or below eliminates PMI from day one. This works especially well in markets where home values have risen 10%+ since purchase.
FHA loans are an exception—FHA mortgage insurance premiums (MIP) last the entire life of the loan if you put less than 10% down. To remove it, you must refinance into a conventional loan once you reach 20% equity.
FHA vs Conventional Loans: Which Down Payment Is Right?
| Feature | FHA Loan | Conventional Loan |
|---|---|---|
| Min Down Payment | 3.5% (credit score 580+) | 3% (first-time buyers) or 5% |
| Credit Score | 580+ for 3.5% down, 500+ for 10% down | 620+ minimum, 740+ for best rates |
| Mortgage Insurance | MIP for life of loan (<10% down) | PMI removable at 20% equity |
| Upfront Fee | 1.75% of loan (can be rolled in) | None |
| Loan Limits (2025) | $524,225 (up to $1,209,750 high-cost) | $806,500 (up to $1,209,750 high-cost) |
| Best For | Lower credit scores, limited savings | Good credit, planning to stay long-term |
If your credit score is above 700 and you have at least 5% to put down, a conventional loan almost always saves you money over the life of the mortgage. FHA loans exist for borrowers who can't qualify for conventional—they're a safety net, not a first choice.
Closing Costs: The Hidden Cash You Need
Closing costs range from 2% to 5% of the home price and cover lender fees, title insurance, appraisal, escrow, attorney fees, and prepaid items (property tax and insurance). On a $400,000 home, expect $8,000–$20,000 in closing costs on top of your down payment.
Here's a typical breakdown:
| Closing Cost Item | Typical Range |
|---|---|
| Lender origination fee | 0.5–1.0% of loan |
| Appraisal | $300–$600 |
| Title insurance | $1,000–$3,000 |
| Attorney/escrow fees | $500–$2,000 |
| Recording fees | $50–$250 |
| Prepaid property tax & insurance | 2–6 months of escrow |
| Home inspection | $300–$500 |
You can negotiate some closing costs. Ask the seller to cover a portion (seller concessions of 2–3% are common), shop around for title insurance and lender fees, and ask your lender about no-closing-cost options (which roll costs into a slightly higher rate). Always review the Loan Estimate carefully—lenders are required to provide it within 3 business days of your application.
5 Ways to Build Your Down Payment Faster
- Open a dedicated high-yield savings account. Keeping your down payment fund separate from your checking prevents accidental spending. A HYSA earning 4.5% on $30,000 generates $1,350/year in interest.
- Automate monthly transfers. Set up automatic transfers on payday. You can't spend money you never see in your checking account.
- Redirect windfalls. Tax refunds, bonuses, and side-hustle income go straight to the down payment fund. A $4,000 tax refund is equivalent to 8 months of $500/month savings.
- Use down payment assistance programs. Over 2,000 programs exist nationwide. Many offer grants or forgivable loans of $5,000–$25,000 for first-time buyers. Check your state housing finance agency.
- Cut one major expense temporarily. Moving from a $2,000/month apartment to a $1,400/month share saves $7,200/year. Two years of that gets you $14,400 toward your down payment.
Use our mortgage calculator to see how your down payment affects monthly payments. Track your savings progress with the savings goal calculator. Deciding between renting and buying? The rent vs. buy calculator compares total costs over any timeframe.